Swan puts faith in China

Strong growth in China would largely insulate Australia from ­economic downturns in the United States and Europe, Treasurer
Wayne Swan
said yesterday, and the government is still clinging to its forecast of delivering a budget ­surplus next financial year.

Speaking after one of the most volatile weeks on record for global markets, Mr Swan said the largest economy in Asia had tremendous flexibility to fire up its domestic market. But he conceded that if Chinese exports to the US and euro zone stumbled it would have an impact on Australia.

After the gyrations on markets last week, fears have emerged that Europe and the US will go into severe downturns. Figures at the weekend showed France had stalled, adding to mounting concerns that its AAA credit ­rating could be put under review.

But market traders were buoyed by proposed budget cuts in Italy and US retail sales figures that were better than expected. Wall Street ended the weekend slightly higher. The S&P/ASX 200 is tipped to open 41 points higher this morning

Notwithstanding the mining boom, higher domestic unemployment figures, sluggish retail spending and an export sector struggling with the high Australian dollar have all led to more gloomy predictions for the domestic economy, including doubts over whether the government can deliver the promised surplus in 2012-13.

But Mr Swan, in his weekly economic note, repeated the government’s pledge to bring the budget back to surplus by 2012-13 while admitting “current events make that task that much tougher’’.

Prime Minister
Julia Gillard,
addressing an Australian-American Leadership Dialogue in Perth on ­Saturday, focused on the importance of maintaining a strong alliance in the face of dynamic changes in Asia. She urged the US to regain its economic momentum.

“We watch with a sincere desire to see your mighty country’s economy regain its momentum,’’ Ms Gillard said. “I do have faith in the ability of the United States to get its economic house in order even if too often for comfort it takes a crisis to force ­decisive action,’’ she added.

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Mr Swan, speaking ahead of a trip to China in a fortnight, said there was an under-appreciation of how the dynamics of China’s economy were changing beyond churning out goods for the US and Europe.

“China has the policy flexibility to fire up its domestic engines of growth if external conditions fall sharply. “Capital investments, rather than exports, are increasingly driving China’s economy . . . in recent years half the nation’s growth has come from building things like roads, bridges and homes,’’ he said.

Strong growth in the Chinese ­middle class was fuelling domestic demand and would mean opportunities for Australia’s resources sector as well as tourism operators, education providers and manufacturers of high end goods.

But World Bank President Robert Zoellick said last night China’s growth model would need to change and the country faced major structural reforms.

Mr Swan insisted that Australia would also benefit from strong growth in the years ahead in India, Indonesia, Vietnam and other Asian economies.

“It won’t be all smooth sailing . . . and China has more work to do to further increase domestic demand, but the underlying trends in our region are positive not just for the next few years but the next few decades,’’ he added.

But Commonwealth Bank chief executive
Ralph Norris
said that while he believed the Australian economy was in “pretty sound shape’’ a downturn in the US could harm future prospects between Australia and China.

Mr Norris said he was more concerned about the threat of a US recession on China and the knock-on effect for Australia than the euro zone debt crisis. “Certainly the US is the largest consumer of product out of China, so that obviously has an impact potentially back on Australia because of the tight linkage we have to China these days, so that would probably be my biggest concern,’’ Mr Norris told ABC’s Inside Business.

Assistant Treasurer
Bill Shorten
became the latest in a string of ministers to soften the tone of the commitment to the budget surplus yesterday saying it was an everyday “guiding principle’’.

“You have to live on another planet not to recognise we have had quite a lot of volatility and upheaval in the recent week. But the fundamentals remain the same, we’ve set our direction, we’ve set our course, we know where we are going,’’ he added.

Opposition education spokesman
Christopher Pyne
said yesterday the government was clearly backsliding from its surplus promise.

“It was a complete guarantee, iron-clad, now it’s an objective,’’ he told Channel Ten.

“It won’t be long before its an unfortunate nightmare that the promise was ever made at all.

“Everyone knows Labor cannot deliver surpluses and they don’t know how to cut spending,’’ he added.